Does Rajesh Exports (NSE:RAJESHEXPO) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Rajesh Exports Limited (NSE:RAJESHEXPO) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rajesh Exports

How Much Debt Does Rajesh Exports Carry?

You can click the graphic below for the historical numbers, but it shows that Rajesh Exports had ₹8.94b of debt in September 2020, down from ₹28.9b, one year before. However, its balance sheet shows it holds ₹29.5b in cash, so it actually has ₹20.6b net cash.

How Strong Is Rajesh Exports's Balance Sheet?

The latest balance sheet data shows that Rajesh Exports had liabilities of ₹84.3b due within a year, and liabilities of ₹1.25b falling due after that. Offsetting this, it had ₹29.5b in cash and ₹89.3b in receivables that were due within 12 months. So it can boast ₹33.4b more liquid assets than total liabilities.

It's good to see that Rajesh Exports has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Rajesh Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Rajesh Exports's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Rajesh Exports's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Rajesh Exports may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Rajesh Exports created free cash flow amounting to 4.4% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Rajesh Exports has ₹20.6b in net cash and a decent-looking balance sheet. So we are not troubled with Rajesh Exports's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Rajesh Exports that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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